A U.S. Bankruptcy Court in Delaware recently pushed a shift in the way we think about privilege in the context of mergers and acquisitions in In re Quicksilver Resources et al., 1:15-bk-10585 (Bankr. D. Del. 016). Quicksilver involved a debtor, Quicksilver resources, Inc., (“Quicksilver”) that motioned the court to dispose and abandon certain legal documents rather than transfer them in its sale to Bluestone Natural Resources II LP. Bluestone, on the other hand, argued that it purchased all of the documents as part of the asset purchase agreement.
Included in the documents Quicksilver sought to prevent transfer of was (1) 1700 documents from its legal department and (2) 22 boxes full of expired oil and gas leases. In determining whether or not the documents would need to be turned over to the new owner, the court looked to the purchase agreement between the two parties to determine whether these documents were to be transferred or abandoned.
The purchase agreement included a carve-out for “information entitled to legal privilege, including attorney work product and attorney client communications.” As such, the court held Quicksilver was not required to turn over the 1700 legal documents. However, the court required the Quicksilver to turn over the 22 boxes of expired oil and gas leases as part of the asset purchase agreement because there was no evidence showing that these leases were not related to any oil and gas assets.
In years past, courts have been less than clear in their application of privilege regarding the transfer of documents to new ownership. Although a bright line rule was promulgated under Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985). that states “[w]hen control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege as well“, courts have made further distinctions that blur that line. Specifically, distinctions between merger-related documents and general corporate documents.
As a result, the Quicksilver Court and others have emphasized the importance of expressly contracting for procedures governing the treatment of privileged documents in mergers and acquisitions. Otherwise, existing case law leaves the parties without reliable expectations for whether privileged documents will survive transfer of ownership. Parties are able to better avoid the gamble they take with the court by negotiating and clearly including the terms under which legal documents will be turned over in the contract.
This blog article was written by John Toth, law clerk.
